The market may be rallying again, but one expert is warnings investors to be ready to sell their ASX bank shares.
The S&P/ASX 200 Index (Index:^AXJO) jumped 1% in morning trade and ASX bank share prices are also trading higher.
The sector is among the best performing ASX shares over the past year, but their best may be behind them.
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ASX bank shares running out of puff
That's the warning from the analysts at Macquarie Group Ltd (ASX: MQG). They believe ASX bank shares could soon be hit by the "buy the rumour, sell the fact" saying.
These shares have been bolstered by falling impairment charges, potential capital returns and cost savings.
But these tailwinds are already priced into ASX banks and are unlikely to drive a further re-rating in the sector, according to Macquarie.
No interest rate boost for ASX bank share prices
Investors are now hoping that rising interest rates will help extend the outperformance of ASX bank share prices. The broker warns that this hope may be misplaced.
"In simplistic terms, we estimate ~8% earnings uplift from a ~25bps shift in interest rates," said Macquarie.
"However, incorporating several likely offsets (such as the impact of replicating portfolios, deposit repricing and mix changes, and BBSW-OIS implications) suggests that the ultimate benefit is substantially smaller.
"We estimate a ~3-4% earnings upside from a ~40bps increase in the cash rate to ~0.5%."
Commonwealth Bank's illusionary advantage
In principle, ASX bank earnings do benefit from rising rates. This is because they can charge more on loans while the rates they pay on deposits only lift marginally in comparison.
Following this logic, some might believe that the Commonwealth Bank of Australia (ASX: CBA) share price would benefit the most. This is because it sources more of its capital from deposits compared to its peers.
However, Macquarie's analysis shows that the CBA share price does not benefit any more to the other three big ASX banks.
Poor track record
History also isn't on the side of ASX bank share prices. The results are mixed when looking at past performance of the sector during times when rates are rising.
This is particularly so when it comes to the cash rate. That's the official interest rate set by the Reserve Bank of Australia.
"Our analysis suggests that the perceived benefit for banks from rising rates appears to be inflated. The impact of rising rates on Australian banks' performance since the early 90s varied, led to banks underperforming on average by ~1%," added Macquarie.
"Similarly, when we analysed four recent examples offshore when rates went up from close to zero levels, banks generally underperformed."
On that note, Macquarie is urging investors to take profits ahead of the cash rate cycle turning.
ASX bank shares to buy and sell
The one to sell is the CBA share price as the broker downgraded it to "underperform" from "neutral" following its big rally.
On the other hand, Macquarie upgraded the National Australia Bank Ltd. (ASX: NAB) share price to "outperform" as its underlying trends continue to improve.
